The Evraz group, controlled by Roman Abramovich and Alexander Abramov, is listed on the main board of the London Stock Exchange (LSE). It is also the second most indebted steelmaker in Russia, with a current debt of about $6.5 billion, and a loss on its 2013 balance-sheet of $572 million.

This parlous condition is obliging Abramovich and Abramov to get rid of as many of their lossmaking steelmills as they can, and avoid defaulting on their bank loan covenants. Because the duo miscalculated when they paid premium prices for their foreign assets, the writedowns to the current value of their purchases are inflicting big numbers on the loss line of the Evraz financial reports, eliminating shareholder dividends, and cutting market capitalization. At the moment, the market values Evraz at £1.3 billion ($2.2 billion) – that’s to say, one-third of what Evraz owes its banks. The market capitalization has been dwindling steadily since February 2012 when it was £6.9 billion. Among Russian steelmakers only Igor Zyuzin, owner of the Mechel group, has generated more debt, and destroyed more asset value.
Abramovich and Abramov may not be able to make profits in the currently depressed global steel market, but they have a chance to regain share value if they can close down and liquidate the non-Russian assets least likely to recover. Here is what happened when they decided last October to close Claymont Steel, in the US state of Delaware. Their year-long attempt to sell off their South African property, Highveld Steel & Vanadium, at double the market price, financed by a Russian state bank, has proved to be a tale of scandal and failure. Click here.

Even if there are no buyers for the distressed assets at any price, there is another option for Abramovich and Abramov (right, left). That is to borrow and buy the disposals on their own account, paying less than they stand to gain in capital value for their Evraz shares. This sounds like a profitable idea, but it can’t be done in secret – at least not according to the rules for related-party transactions of the London Stock Exchange. The reason ought to be obvious. Such secret deals may be more beneficial to the control shareholders than the public shareholders would agree to, if they knew the details.

On this point, the Evraz management is bound to comply with the disclosure and conduct rules of the LSE, especially LR-11, the rule governing related-party transactions. Related parties are defined by the LSE to be those which directly or indirectly control one another, or are subject to common control from a third party, or are “subject to influence from the same source to such an extent that one of the parties to the transaction has subordinated its own separate interests.”

What should happen if Evraz is contemplating a related-party transaction is that it must disclose the details, not only of the transaction, but also of the nature and interest of the related party. If the party is a private company registered in an offshore location, the reporting should identify the beneficial owner or owners. These disclosures should be made to the UK Listing Authority, and also to the public shareholders.

The LSE and the regulatory authorities, the UK Listing Authority and the Financial Conduct Authority, make an exception to these requirements. If Evraz were to sell off an asset at a price that is less than 5% of the total value of the assets Evraz retains, then public disclosure isn’t required. Even so, the company would be bound to inform the Listing Authority and provide an independent asset valuation to substantiate the claim for the exception.

According to its asset valuation as of March 31, 2014, Evraz’s assets total $17.7 billion. That includes an amount of $804 million, tagged “assets of disposal groups classified as held for sale”. That sum is just 4.5% of the asset total, so Evraz can avoid telling its shareholders who is buying them, if they are sold for that much, or less.

During the twelve months Evraz says it has been trying to close its deal to sell Highveld to the South African company Nemascore, no details have been disclosed of the buyer’s beneficial owners, capacity to pay the purchase price, interest in the steel business, or closeness to the South African President, Jacob Zuma. Evraz has justified the secrecy by referring to a confidentiality agreement between buyer and seller.

When Evraz bought the Vitkovice steelmill from the Czech Government in a 2005 privatization deal, Abramovich and Abramovich paid $285 million.

The Vitkovice steelmill has been in operation since 1828. In 1843 it was bought by the Viennese branch of Rothschilds (upper left). Hermann Goring (right) took it in 1939.

The Evraz takeover price was lower than at least one competing bid from a Czech group, or so it alleged in an unsuccessful court challenge. That was just the start of Evraz’s problems at Vitkovice. After eight years it announced in the annual report for 2012 that Vitkovice, along with Highveld, were for sale. According to the report, Evraz calculated (at page 69) that altogether, the assets of Highveld and Vitkovice were worth $930 million, while their combined liabilities added up to $478 million. So their net asset value was $452 million.

When Evraz announced in March of 2013 that it was selling Highveld for the improbable price of $320 million, that implied the selling price for Vitkovice in Evraz’s counting house was just $132 million. One year has gone by to prove just how preposterous the Highveld deal was.

On April 4 Evraz announced it has sold Vitkovice for “a gross consideration of US$89 million adjustable for the actual level of EVS working capital. In addition the buyers have assumed US$198 million of EVS [Evraz Vitkovice Steel] debt liabilities, including the repayment of US$128 million of EVRAZ’s inter-company debt.” The buyers were identified as five Cyprus front companies: Martinley Holdings Limited, Nabara Holdings Limited, Vitect Services Limited, Hayston Investments Limited and Dawnaly Investments Limited.

The Evraz notice indicated that as of December 31 last, Vitkovice had gross assets of $278 million. That makes 0.16% of Evraz’s asset total. Net of debt, Vitkovice’s assets may be worth $80 million. Its financial report for 2013 showed it produced $442 million in revenues, but earnings were negative by $2 million, and its pre-tax income line was in the red by $32 million.

The reaction of the Moscow financial press was to suspect the buyout had been arranged by the control shareholders standing behind the Cyprus entities. The effect on the London exchange was an immediate lift in the Evraz share price and market capitalization by £354 million ($588 million), more than offsetting the cost of the Vitkovice transaction to the buyers. Compared with a month ago, Evraz is now worth 50% more.

On April 15 Kommersant reported from Moscow that a source familiar with the Vitkovice transaction had identified the buyers as Industrial Union of Donbass (ISD), the Ukrainian steelmaker, and Alexander Katunin (right), an associate of Abramov’s in the past. Noting that Katunin had been financed by state bank Vnesheconombank (VEB) to buy into ISD in 2010, the newspaper said it suspected Russian state bank financing again for the purchase of Vitkovice from Evraz. Ground for the suspicion is that neither owner of ISD, Katunin and the Ukrainian steelmaker Sergei Taruta, have the means to pay for the deal themselves, let alone continue financing Vitkovice. ISD itself, with two smelters in eastern Ukraine and one each in Poland and Hungary, is losing more than $300 million per annum.

There is another sensitive problem. Taruta (right) is currently the governor of the Donetsk region, appointed by the Kiev regime after the ouster in February of President Victor Yanukovich. Russian Government statements have explicitly rejected these regional appointments as lacking in local or public support, and called for direct election of new governors.

President Vladimir Putin has publicly condemned Igor Kolomoisky, the newly appointed governor of neighbouring Dniepropetrovsk region. Kolomoisky has announced that he is paying for the fuel in Ukrainian Army vehicles, and posted a bounty for Ukrainians to capture or kill pro-Russian demonstrators.

Taruta has been keeping his head down during the demonstrations in his region, and has so far avoided direct criticism from Moscow. So far, noone in Moscow and noone in the Ukraine has cottoned on to the possibility that through the Evraz sale of Vitkovice, Taruta may be on the receiving end of a substantial benefit from a Russian state bank.

If so, the conduit is Katunin, Taruta’s partner at ISD. Katunin appeared on a Moscow radio station last October calling himself chief executive of Midway United, and proposing a plan to privatize Russia’s national forests. His scheme is to sell every Russian 10 acres of forest for ten thousand roubles per acre with financing over ten years.

Russian records indicate that Alexander and other members of his family have been involved in offshore trading of Russian gas and metals. The Lugano-based metals trader Carbofer was the entity through which Alexander Katunin bought into ISD in 2010. Before that, in 2007, he and Abramov had agreed to transfer Evraz’s proprietary steel trader EvrazMetall on to the Swiss balance-sheets of Carbofer. EvrazMetall was an agency for a variety of trading schemes of the control shareholders until the listing and accounting rules required by Evraz’s initial public offering (IPO) in 2005 required a reform. Alexander Frolov, the Abramov protégé promoted to be chief executive of Evraz, started out for the company inside EvrazMetall. So did another senior executive at Evraz, Leonid Kachur. In October 2009 Evraz announced it was buying back from Carbofer its Russian metals trading business, freshly named, er renamed, EvrazMetall.

By then Carbofer had passed its peak, and had started a slide in trading revenues which left it washed up and on the run from its creditors in 2012.

Some press reports have claimed that Katunin was a co-founder and original shareholder in Evraz. This is unsubstantiated in Evraz’s own accounts of its shareholding history. The founders were Iskander Makhmudov and Oleg Boyko, who delegated the running of the company to Abramov. Against Abramov there have been several claims for shareholding stakes in the original assets of the group. When Andrei Sevenyuk, the chief operating officer, died in mysterious circumstances in 2004, his widow threatened to sue Abramov for Sevenyuk’s shares and received a settlement. Another widow sued in the UK High Court for return or payment for a shareholding Aidyn Kurbanov had put in trust with Abramov before his death. The story of the trusts Abramov claimed for himself can be read here. Between 2003 and 2006 three helicopter crashes were fatal for senior Evraz executives.

In the Evraz IPO prospectus of 2005, three founding shareholders were identified – Abramov, Frolov and a Ukrainian chief operating officer, Valery Khoroshkovsky (2.08%). Katunin was neither stakeholder, nor co-founder, nor manager at the time. In 2009, an Evraz bond prospectus did not identify Katunin as manager or shareholder. Cousins to Abramov, Alexander and his brother Vladimir had been associated together in the original EvrazMetall trading business, according to this version. But the Katunins were traders, not stakeholders. This version from a Carbofer source in 2007 claimed that Alexander Katunin was the owner, but not the manager of the trading operations – front man for silent partners.

Katunin’s business record also suggests that when Carbofer hit the rocks, it was not the first nor the last of such outcomes for his business. That he, Taruta and ISD should have $89 million in cash, or borrowing capacity to cover Vitkovice’s $198 million in debts, is unlikely – as improbable as Evraz’s claim to be selling Highveld for $320 million has proved to be.

Evraz has refused to identify the beneficial owners of the Cyprus entities in the Vitkovice deal. The company will also not respond when asked to say whether this is a related-party transaction under LSE rules. Katunin cannot be located in Moscow, and the websites for his Midway United and Carbofer do not work. A spokesman for ISD said his company “does not comment on the Vitkovice Steel issue at all.” Taruta was uncontactable and the website for the Donetsk regional administration has ceased operation.